As COVID-19 spread around the globe, the consequences have been far-reaching. The true costs of this pandemic have been measured not just in human lives, but in financial devastation as well. With businesses shut down and quarantine keeping shoppers at home, many families and companies have been struggling to stay afloat. These are some of the most significant impacts of the pandemic on personal finance and corporations around the world:
Potential Global Recession
Cambridge’s Centre for Risk Studies recently published sobering predictions about the global financial impact of COVID-19. They studied GDP losses in the world’s 19 leading economies and estimated how those losses will add up in the future. Their belief is that these economies could lose $82 trillion or more over the next 5 years from their GDP. With decreased domestic and international trade, and millions of businesses closed indefinitely, such losses don’t seem far removed from reality. While these predictions may never come to bear, economists will be watching GDP numbers closely over the next several years.
Near Record-High Unemployment
Unemployment in the U.S. exceeded 25% during the Great Depression; April’s jobs report showed it rose to 14.7%, the highest it has ever been since then. Although May’s numbers have not been released as of the writing of this article, some experts estimate unemployment could be as high as 20% or more as more than 40 million people have filed for unemployment. If these trends continue and unemployment remains high, economists are prepared to start calling the “COVID Crash” a true depression.
Decreased Tax Revenue
With many employees furloughed, for the time being, revenue from payroll taxes has been cut significantly. This is bad news for retirees, as the Social Security Administration depends on this revenue to support monthly benefits. Social security’s annual Cost of Living Adjustment (COLA) may be the first thing to go, and the Senior Citizens League, a nonpartisan senior advocacy group, is predicting a 0% COLA for 2021 at a time when the buying power of social security recipients is 30% lower than it was 20 years ago.
Dropping GDP with Record Increases in the Deficit
Sky-high unemployment combined with unfettered government stimulus spending could add up to a disaster. Due to the COVID-19 quarantine, the Congressional Budget Office has projected a 38% drop in GDP for the second quarter of 2020, a number that is in line with Wall Street’s own best estimates. Congressional efforts to stimulate the economy, like the monetary stimulus package, expanded unemployment, and the Federal Reserve’s quantitative easing measures may have been somewhat effective but they have also added trillions to the deficit. With Congress looking at another round of stimulus, deficit spending is likely to increase through the end of 2020 and beyond.
Unpredictable Stock Market
Even as the Federal Reserve turned to quantitative easing to steady the ailing stock market, investors have been slow to respond. After taking a nosedive in March, market indices have partially recovered. The S&P 500 and NASDAQ are only a few hundred points lower than they were in February and the Dow Jones recently crossed the 25,000 mark for the first time since the crash. These could all be indicators of good news on the horizon. Of course, a real recovery is far from certain right now, and it seems unlikely that the markets will reach the record highs they experienced in 2019 before the end of this year.
The COVID-19 pandemic has already been disastrous for many Americans in or near retirement. As it continues, the markets are likely to experience many more ups and downs, and if you’re not prepared for them, your nest egg could end up taking a big hit. Luckily, there are retirement investments that can protect your principal from losses while achieving competitive growth. If you’d like to find out more, get in touch with Crash Proof Retirement® today or tune in to the Crash Proof Retirement® Show.